Q1 2022 Arbor Realty Trust Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the first quarter 2022 Arbor Realty Trust earnings Conference call.
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I would now like to turn the call over to your speaker today, Paul <unk> Chief Financial Officer. Please go ahead.
Okay.
Okay. Thank you Leo.
Morning, everyone and welcome to the quarterly earnings call for our Realty Trust. This morning, we'll discuss the results for the quarter ended March 31 2022.
With me on the call today is Ivan Kaufman, our President and Chief Executive Officer.
Before we begin I need to inform you that statements made in this earnings call maybe deemed forward looking statements that are subject to risks and uncertainties, including information about possible assumed future results of our business financial condition liquidity results of operations plans and objectives.
Okay.
These statements are based on our beliefs assumptions and expectations of our future performance taking into account. The information currently available to us factors that could cause actual results to differ materially from arbor's expectations.
These forward looking statements are detailed in our SEC reports listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of today <unk> undertakes no obligation to publicly update or revise these forward looking statements to reflect events or circumstances. After today with the occurrences of unanticipated events I'll now turn the call over to <unk> President and C.
Ivan Kaufman.
Thank you Paul and thanks to everyone for joining us on today's call as you can see from this morning's press release, we had another tremendous quarter.
Which continues to demonstrate our unique ability to consistently deliver outsized returns through our diverse operating platform.
As a result were able to once again increase our dividend to <unk> 38 cents a share and this eighth consecutive quarterly dividend increase representing 27% growth over that same time period.
We believe now.
It is now more important than ever to continue to stress. The many advantages of our unique business model, especially in light of the changing landscape of higher interest rates.
Continued inflation and the potential for another recessionary cycle on the horizon.
We built a premium operating platform that is focused on the right asset classes with a very stable liability structures.
We have a thriving balance sheet GSE agency private label and single family rental business as well as an industry leading securitization platform.
Loud us to produce a long track record of exceptional performance.
Consistent earnings and dividend growth.
And we can't emphasize enough the value of having an annuity based business model with multiple products that produce many diverse income streams.
This has allowed us to consistently grow our earnings and dividends and all cycles, while maintaining the lowest dividend ratio payout in the industry.
A substantial cushion between our core earnings.
Dividends.
There are significant differentiating factors from the rest of our peer group most of which have a mono line business has struggled to maintain their dividends and have very little upside for future dividend growth, especially considering the banana anticipated.
And anticipate a recessionary environment.
And this is why we strongly believe that we're in a class by ourselves and we should trade at a substantial premium.
Much lower dividend yield than anyone else in our peer group.
Turning now to our first quarter performance as Paul will discuss in more detail our quarterly financial results were once again remarkable with.
We produced distributable earnings of 55 per share.
Which is well in excess of our current dividend representing a payout ratio of around 70%.
And our balance sheet business, we had another outstanding quarter as one of the top multifamily balance sheet lenders in the industry. We continue to see opportunities for significant growth as a result, we grew our balance sheet loan book another 17% in the first quarter to $14 2 billion on $2 8 billion of neuro.
Originations.
We also have a very robust pipeline, which gives us great confidence in our ability to continue to meaningfully grow our loan book for the balance of the year.
And again these balance sheet loans create significant value for our platform.
And not only accretive to our current earnings dividends, but also allow us to build a pipeline for two to three years with new GSE agency and private label loans get produced.
Additional long term dated income streams.
Ensuring the long term growth of our platform and creating high quality earnings and dividends for the future.
We have consistently been a leader in the CLO securitization market.
As our financing on high quality balance sheet portfolio with the appropriate liability structures continues to be one of the key business strategies.
We were very successful.
<unk> access the CLO securitization market in the first quarter closing in our 2 billion CLO. The utilization of these vehicles has contributed greatly to our success by allowing us to appropriately match fund our assets with nonrecourse non mark to market long term debt.
And generate attractive leverage returns on our capital and again, we are very focused on the right side of our balance sheet with approximately 60.
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In the first quarter from the sharp increase in interest rates.
However, more importantly, we're seeing a significant uptick in our pipeline as a market is adjusting to the changing rate environment.
We expect to be able to close the year and produce relatively similar agency volumes as compared to the prior year.
Fact, april's origination volume.
But much stronger with $475 million of loan closings.
Our GSE agency platform continues to offer a premium value as it requires limited capital and generate significant long dated predictable income streams and produce significant annual cash flow.
Additionally, our 27 billion GSE agency service servicing portfolio, which has grown 6% in the last year.
Prepayment protected and generates approximately $120 million a year reoccurring cash flow.
This is in addition to the strong gain on sale margins, we continue to generate.
Originations platform, which will continue to contribute greatly to our earnings and dividends.
And as we mentioned on our last call.
Closed our fourth private label securitization totaling 400.
Great and then $90 million in the first quarter, which continues to demonstrate the strength and diversity of our versatile lending platform and tremendous disconnect.
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We've also built a growing single family rental platform with a comp pipeline well in excess of $1 billion, which makes us optimistic about our ability to continue to scale this business going forward.
And the build to rent space, which provides us with the opportunity to originate construction bridge and permanent loans in the same transaction and again like our balance sheet business. This platform provides us yet another path.
Each transactions that will produce additional long dated and constraints.
In summary, we had another tremendous quarter, allowing us to once again increase our dividend.
We strategically built a platform with multiple products that produce many diverse income streams, which provides us with future annuity of high quality long dated reoccurring earnings.
We're also the premier multifamily originated.
In this space.
<unk> invested in the right asset classes with very stable liability structures, which positions us extremely well.
Sweet and every market cycle and gives us great confidence in our ability to continue to significantly outperform our peers.
I will now turn the call over to Paul to take you through the financial results.
Okay. Thank you Ireland as Ivan mentioned, we had another exceptional quarter, producing distributable earnings of $93 million or <unk> 55 per share. These results translated into industry higher Roe of approximately 18%, allowing us to once again increase our dividend for the eighth consecutive quarter to an annual run rate of $1 50.
Two a share.
Our financial results continue to benefit greatly from many aspects of our diverse annuity based business model that allows us to produce multiple income streams from a single investment, giving us confidence in our ability to continue to generate high quality long dated recurring earnings in the future.
Our GSE agency business, we originated $761 million in GSE loans and recorded $1 $1 billion in GSE loan sales in the first quarter, we generated margins on those GSE loan sales of $1, 39% in the first quarter compared to 152% in the fourth quarter as we mentioned on our last call with the <unk>.
In the interest rate environment, we do expect margins to be more normalized in 2022 and the range. We previously guided to of $1, 300% to one 5% depending on the mix of our product.
We also recorded $15 million of mortgage servicing rights income related to $975 million of committed loans in the first quarter, representing an average MSR rate of around $1, five 7% compared to 188% last quarter, mainly due to having a greater mix of Fannie Mae loans in the fourth quarter versus the first quarter.
And those loans contain higher servicing fees.
Our servicing portfolio was approximately <unk> 7 billion on March 31, with a weighted average servicing fee of 44 basis points and has an estimated remaining life of nine years. This portfolio will continue to generate a predictable annuity of income going forward of around $120 million gross annually, which is relatively unchanged from last quarter.
Due to the continued increase runoff in our portfolio as a result of this runoff prepayment fees related to certain loans that prepayment protection provisions continue to be elevated with $16 million and prepayment fees received in the first quarter compared to $20 million in the fourth quarter and.
Our balance sheet lending operation, we grew our portfolio another 17% to $14 2 billion in the first quarter on volume of $2 8 billion of.
$14 2 billion investment portfolio had an all in yield of 474% at March 31, compared to $4, 62% at December 31, mainly due to increases in LIBOR and sulfur rates largely offset by higher rates on runoff as compared to new originations during the quarter the.
The average balance in our core investments increased substantially to $13 billion. This quarter from $10 5 billion last quarter, mainly due to significant growth we experienced in both the first and fourth quarters.
The average yield on these investments was $4 eight 6% for the first quarter compared to five three for the fourth quarter, mainly due to higher interest rates on runoff as compared to originations in the first and fourth quarters, partially offset by the effect of higher sulfur and LIBOR rates in the first quarter net of the impact of LIBOR floors on our portfolio.
Total debt on our core assets was approximately $12 9 billion at March 31, with an all in debt cost of approximately $2 eight 1%, which was up from debt cost of around $2, 61% at December 31, mainly due to increased LIBOR and so far it separates the.
The average balance in our debt facility was up to approximately 12 billion for the first quarter from $9 4 billion in the fourth quarter, mostly due to financing the growth in our portfolio and the average cost of funds in our debt facility was flat at 265% for both the first and fourth quarters from slightly higher average interest rates offset by reduced pricing from a CLO.
Vehicles and warehouse facilities.
Overall net interest spreads in our core assets decreased to $2 two 1% this quarter compared to 238% last quarter and our overall spot net interest spreads were also down to 193% at March 31 from two 1% at December 31, due to yield compression on new originations as compared to runoff and from <unk>.
Cost increasing more than asset yields as a result of rising interest rates and LIBOR floors that are still in effect on certain loans in our portfolio.
However, it's important to note as the current LIBOR and sofa curves are predicted to continue to increase.
Any further increases in these rates will produce a net positive increase through our net interest income spreads on our balance sheet book due to rates being above the average LIBOR floor is in our portfolio. In fact, all things remaining equal a 1% increase in rates would produce approximately <unk> <unk> a share annually and additional earnings.
Additionally, as rates rise, we will begin to earn more income from the significant amount of escrow balances. We have from our agency business and large balance sheet loan book, which will also increase our earnings going forward and is unique to our business model.
That completes our prepared remarks for this morning, and I'll now turn it back to the operator to take any questions. You may have at this time Leah.
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We will take our first question from Steve Delaney JMP Securities. Please go ahead.
Good morning, Ivan and Paul Thank you for taking my question.
It strikes me a lot of a lot of positive things in your report, but it strikes me as if I had to pick one highlight in the quarter. It would be the structured business volume $2 8 billion took the portfolio up 16%.
That wouldn't happen.
That business wouldn't happen without your access to CLO.
I think you would agree and could you talk a little bit about.
The latest CLO, I guess that CLO $18 billion to $2 billion, and maybe talk a little bit about that execution compared to say the CLO 17, but you did late last year. Thank you.
Sure.
So clearly the last CLO we did.
2 billion was very sizable.
And it was important for us given the volume.
If you look in the I think commercial a bit over one or two rigs.
Actually there was a CLO that was just price, we really can't speak about it but it's in there for an active issuer.
Obviously close.
The pricing of Cielo is a change.
With the market and the good news about the way we run our business, we're always on track as to where the market is and adjusting the pricing of our originations to match the CLO execution.
Clo's continue to change our pricing to our customers continue to change.
We always like to have somewhere between 50% to 75% of CLO.
At <unk> total Outstandings were currently sitting around 65%, which is a very comfortable rate.
Relative to where we want them base.
Typically in this cycle. So we are well prepared with our clo's and without liability structure is pretty much intact and very comfortable with our position.
Okay.
The average spread there was.
LIBOR, plus 181 and that was flat to the CLO 2017.
We expect that that is where the market is.
Is today, and we will kind of remain in that near 180 basis point range on a weighted average spread.
No not at all the market's widened out considerably in fact, we've raised our pricing.
Our consumers I think five times since December so we've been crazy pricing.
Five times to.
<unk>, where the market is and.
Basically each price increase.
Also we adjusted our credit guidelines considerably over the last nine months as well.
So if you take those five increases we've increased our price and five eights to almost three quarters across the board down to gradually to match.
Yeah.
So that's how our business runs usually theres a lag of a couple of weeks, but not that much of a lag. So we're consistently taking new loan originations pricing them accordingly to where the CLO market were pretty aggressive about it some of the people in the market leg a lot more than we do we're pretty much spot on given our.
The level of volume and where we are in a market and more specifically a real clear knowledge of where the CLO market is executing too.
Yes, Paul I just wanted to correct you. So yes, we had a 181 pricing on our lab CLO as you mentioned the one before it was 168, so things have widened a little bit as Ivan said and continue to but as Ivan mentioned, we're totally in tune to what a levered return is and.
Because were so active in the CLO market, we are able to adjust our pricing according to get to that targeted Levered return, which is something that I think is unique to our platform as we're so in tune to what that market is and we're a market leader.
Great.
You are asked fr product and your BFR product do I understand that you were putting those loans into the same CLO program that you do with your traditional bridge loans.
On the exit but not on the not on the aggregation aspect. So when it comes to the construction.
What we'll do is done on a separate line. Some other loans on the bridge side once they stabilize there'll be golar cost lowest risk fit multifamily characteristics.
Got it but during the interim because of the complexity of construction draws and everything.
That's your take CLO takeout once you're past year.
Youre development construction period. Once you are at a stabilized once youre in a stable at once.
The store up and running and get it leased up yes, yes. Thank you both for your comments.
Thanks, Steve.
And once again that is star one to ask a question, we'll move next to Stephen laws of Raymond James.
Hi, good morning.
And Paul you guys have both touched on this a number of quarters in a row and would love to get updated thoughts and I think Paul you touched.
It's a little bit on your prepared remarks, but you know kind of early repayments.
Been running pretty high the last few quarters kind of curious what youre seeing there maybe in April or.
Volatility and maybe changing macro outlook.
<unk> made some people are more reluctant to pay those penalties to refi early.
Sure. So let me give you some numbers, Steve and then I'll turn it to Ivan for the market color.
You did mention I should address some of that in my prepared remarks.
It still continues to surprise me that the level of prepayments were seeing there's still a lot of sale activity in the market prices are still elevated and we will see where that goes with the changing environment, but we did have another $1 billion $2 50 of agency run off in the quarter that generated $16 million of prepayment fees as I've said last.
Quarter, we do think that slows down as interest rates rise, obviously naturally yield maintenance burns off when interest rates rise. Although we did say we thought it would be elevated in the first and maybe the second quarter and we were right. It was elevated in the first quarter and the second quarter in April we had $350 million of agency run off in April and we.
Just over $4 million in prepayment fees from that so we do think it slows over time when that happens exactly is hard to determine but obviously with.
Rising interest rates those numbers will be more challenging to have higher prepayment fees, but I'm going to give you. His view on where he thinks runoff goes given the state of the market and how people view those those prepayment fees challenges.
Yes, I think we will have another robust quarter next quarter, because there's still a lot of assets in the market for sale. However, the prepayment fees could come down a little bit as the yield maintenance is a little less because rates were a little bit higher.
Multifamily values seem to still seem to be maintaining themselves. So the substantial gains that a lot of people have.
And then multifamily assets and a lot of people are monetizing those gains even if they have to pay prepayments because their gains way outweigh the prepayment factor relative to the airport.
Total gain perspective.
So I do think they will slow a little bit in the third and fourth quarter as the market kind of takes a readjust a little bit.
But.
We certainly expect a reasonable quarter next quarter.
Great I appreciate the comments this morning, Ivan and Paul.
Thanks, Steve.
We will take our next question from Crispin Love of Piper Sandler.
Thanks, Good morning, everyone.
On the origination trajectory.
Correct.
Think last quarter, you were talking about kind of 1 billion per month or a little bit less than that so just curious if you could provide an update on what youre seeing currently and then also how that could impact the originations in the second quarter and throughout the year.
Sure well clearly we're the market leader provide.
Providing bridge that the multifamily sector.
Even as we continue to raise our pricing and I think we had two price increases over the last 14 days.
We're still seeing origination.
Originations at similar level of about $1 billion, a quarter, which is where we're kind of managing it.
So for the moment.
Pretty reasonable shape of our pipeline.
I think that through.
Through June and July were at that level.
We haven't seen a slowdown is at this point I think with the volatility.
Fixed rate market I think people are still very interested in.
Heading towards.
For the right deals until they see the market settle out.
In addition, I think you still have at least six.
Okay.
Pumping.
Property.
Rents to market and there is like a 10% gap between rents at year ago and today.
I think until you see that full turn of rents the bridge product will be attractive financing alternatives, especially in this market volatility.
Christmas Paul welcome by the way and thank you for your participation.
And to point out I will just give you a couple of numbers for April because we have them. Obviously, we're in may. So we did close $800 million bridge product in the month of April we did have $500 million of runoff.
In April , but as Ivan said, our clip and our pace is probably between that $800 billion a month going forward of the 500 run off we did see in our balance sheet, but we were able to recapture 35% of that in our agency product, which is great and Thats. Our model as you know that's what we strive for and so of the $475 million of agent.
<unk> product we did in April .
35% of that 500 million that ran off in the balance sheet book went right to the agency products. So that's our model that's great execution for us that's what we strive for but those are some of the numbers around around April .
Great. Thanks.
Helpful. And then just one on gain on sale revenue it seemed like it was.
Lower in the quarter sequentially can you just speak to what drove that or are there any noncore items, there thats driving that or is just something that I'm missing there.
So let me take you through that so first of all you got to look at it as two line items crisp on the P&L, you've got to combine a little bit and we do it and distributable earnings to help you guys on Iraq. So the gain on sale of fee based services and gain on sale item did look really low, but then you've got to look at the gain on the gain from derivatives line and we had our APL securitization.
A $489 million in in the first quarter, and obviously with where interest rates went the assets were worth less debt fixed rate assets, but the swaps will work more so the swaps we usually in the money the assets were less than the money. So you've got to take about $17 $1 million of that $17 3 million on that line item and added up to the game.
On sale number that puts you at about $19 million on a gain on sale, which is about a margin of 101, 18, and thats because the API product gapped out a little bit and we had a little less margin on that than we have in the past, but on the agency business. If you strip out the APL and that $1 1 billion of agency, we did about a $101 39 margin and that was.
Compared to a $101 50 to margin in the past, but I've said in my commentary is given the change in interest rates, we do expect margins to be a little tighter, but some of it also has to do with mix, we had less FHA loan sales in the first quarter than we did in the fourth quarter and Thats just timing of when stuff originates and when we sell it and obviously the.
Business as we've commented in the past is like a 104 business. So that certainly can skew the margins and then we also have the single family rental business. We also have a permanent loan product.
We originate fixed rate loans, and then we sell them into the market with no risk and we had we really didn't have any of those sales in the first quarter again, it's timing and we had a few of those sales in the fourth quarter and those were like a 100 to 103 margin. So a lot of it is mix on the on the general straight down the middle Fannie Freddie the margins haven't really changed it just has to deal with them.
And Thats why we guide to a $101 30 to $101 50 margin going forward.
Great. Thank you Paul Thanks for the clarification there.
And once again that is star one to ask a question.
We'll move next to Jade Ramani of K BW.
Thank you very much volumes continue to remain extremely strong in the market.
And at this point do you think that's a function of investors rushing in to capture current interest rates before there's future increases or something else that's driving that.
I think the multifamily sector seems to be one of the most resilient sectors.
I think there's just a lot of investor demand in this sector.
We're seeing that also in the build to rent sector as well.
No.
Those are just two sectors that continue to drive a lot of.
A lot of equity and.
The sales from what I hear in the first quarter and to date are still extremely strong.
I do believe there'll be a little bit of a reset as rates change and people take a step back and reevaluate.
But we're pretty optimistic.
Sure.
Overall multifamily sales opportunities going forward for the balance of the year.
Maybe they will cool off slightly but even if they do call off go Ria Johnston.
Maybe you'll have a gap for about 60 days as the market resets to how they're going to view.
Interest rates.
The potential for a recession.
Okay.
Thanks, and then that gap do you expect.
There's going to be multifamily cap rate widening.
Could you put some parameters, perhaps around the magnitude that you're thinking.
Thank you Hannah.
Contrary to everybody else, we've been we've been.
Very much anticipating inflation and a potential recession, and we've underwritten cap rate expansion to about 50 basis points from where it is today.
Heavily criticized for desktop position, we believe that.
As rates widened.
And rent growth slows you'll see.
A bit of a widening of the cap rate side, even if you have strong investor demand you still need to have.
Returns to their equity and Thats our perspective.
Thank you very much on the $500 million of runoff you saw in April .
75% of those went into agency. So those refinanced from a bridge product into fixed rate products with long term longer term duration what are the other 65% due in your and your insight.
Yes, most of it so you're right, 35% and most of that 35% was a large deal.
We had on the bridge side that we were able to take out the agency side, which is great. The rest of that for the most part were sales that walked away.
So we didn't recapture the rest of that because it was mostly as a result of the sales of properties, which we don't always control the takeout on the sale.
Thank you.
Just a strategic question the platform the company overall has grown tremendously over the last multiple years.
As a cohort of mortgage Reits that you could argue are subscale.
And the market trading at discounts to.
Net asset value or book value.
With acquisitions M&A ever be something of interest or do you believe.
Scott this unique.
Multifamily focused platform that works well between our structured and the GSE business that not really interested in branching out.
Have any of that can you repeat the question I fell off the call I'm sorry by background.
Yes, it's an M&A question mergers and acquisitions.
Albert has grown tremendously over the last five years.
And has a strong niche within the multifamily small.
Small balance as well as bridge lending.
Market.
The company be interested in M&A in the mortgage REIT space to expand its overall footprint into other products or is that not really.
Our focus.
I think we've always had a history of M&A, we havent done that much over the last couple of years only because we think the pricing and the market has really been.
A little bit.
Inappropriate for it to be accretive to the company.
I think now as we go into a different cycle and maybe some opportunities to expand our product lines.
Some ways, we do business, so I think given the strength of our balance sheet and our performance.
Our earnings and our position in the marketplace. It could be some opportunities if there is a bit of a downturn.
Thanks, very much for taking the question.
Thanks, Dan.
This concludes our question and answer session I'm happy to return the call to Ivan Kaufman for closing remarks.
Alright, well. Thank you everybody for your participation it's been clearly.
Another great quarter.
Had a great run.
For a long period of time.
There is a changing environment, which we believe we are extraordinarily well positioned for it.
We look forward to everybody's participation next quarter have a great weekend everybody.
Thank you.
This does conclude the first quarter 2022 Arbor Realty Trust earnings Conference call. You May now disconnect your lines and everyone have a great day.
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Yeah.
Yeah.
Yeah.
Yeah.